Oil Refining Aims for a Rebound... 'Stronger Sprint' in Chemicals and Steel

2021 Industry Outlook ⑤ Oil Refining, Chemicals, and Steel

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[Asia Economy Reporter Geum Bo-ryeong] The petroleum industry, which was hit hard by the novel coronavirus infection (COVID-19), is expected to have a high possibility of rebound in the economic recovery phase next year. In the chemical industry, some products benefited from COVID-19, and additional market improvements are expected next year due to the recovery of existing demand. The steel market is expected to maintain a favorable trend until the first quarter of next year.

◆Petroleum, Post-COVID-19 Expectations= The petroleum industry was one of the most severely affected sectors this year due to a sharp decline in demand caused by COVID-19. Transportation demand, which accounts for 60-70% of the total, was sluggish due to movement restrictions from lockdown measures. However, from next year, the industry is considered highly likely to rebound through the gradual easing of COVID-19 impacts and economic recovery. According to Meritz Securities, crude oil demand is expected to decrease by 8% compared to the previous year this year, but it is expected to increase by 6% next year compared to the previous year and recover to pre-COVID-19 levels in 2022.

Along with the expected simultaneous rise in gasoline and diesel margins, the margin advantage of diesel over gasoline, which has continued since 2018, is also expected to persist. In the case of gasoline, the expansion of electric vehicle adoption centered on passenger cars is one of the factors causing mid- to long-term demand slowdown. Considering that diesel is more important than gasoline from the perspective of Korean petroleum companies, this is regarded as a positive issue. Noh Woo-ho, a researcher at Meritz Securities, explained, "We expect the two domestic petroleum companies, S-Oil and SK Innovation, to return to profitability next year," and "We recommend increasing the weighting on the petroleum sector."

◆Chemicals, Good but Expected to Get Better= Despite the spread of COVID-19, the chemical industry saw a surge in demand due to hygiene products, packaging materials, etc., driving a favorable chemical market centered on products such as acrylonitrile butadiene styrene (ABS), low-density polyethylene (LDPE), and NB latex. Demand for these products is expected to continue next year.

Demand recovery is also expected in previously sluggish downstream industries. Han Sang-won, a researcher at Daishin Securities, analyzed, "Although the market conditions for synthetic rubber and chemical fiber raw material product groups were sluggish due to demand deterioration in major downstream industries such as automobiles and clothing this year, additional market improvements will be driven by demand recovery in the future."

In the chemical fiber chain, difficulties were experienced as clothing consumption expenditures necessary for going out decreased due to lockdowns and social distancing, but demand-side improvements have been confirmed since the second half of this year as China's clothing retail sales returned to growth from August. Although high inventory levels remain a burden, the observed demand improvement and inventory reduction are viewed positively.

Assuming an elasticity of 1.0 relative to global economic growth, Daishin Securities forecasted an increase in chemical demand based on ethylene of about 9 million tons next year. Considering that elasticity exceeded 1.0 during the recovery process after the economic shock, a significant increase in demand is also considered highly possible.

An employee of Hyundai Steel Dangjin Steelworks is tapping molten iron from the No. 3 blast furnace. (Photo by Asia Economy DB)

◆Steel Price Strength to Continue Until First Quarter of Next Year= Global steel prices continue to rise. This is because steel demand recovery has appeared since the third quarter due to the solid trend of China's manufacturing PMI and the recovery of global automobile sales. Additionally, iron ore prices surged due to downward production guidance from major mining company Vale and concerns about Australian cyclones.

Thanks to the strong steel prices, steel stock prices also rose. POSCO's closing price increased by 30.77% over two months, from 208,000 KRW on October 30 to 272,000 KRW on the 30th of last month. During the same period, Hyundai Steel also rose by 37.02%, from 28,900 KRW to 39,600 KRW. Samsung Securities raised its operating profit estimates for POSCO and Hyundai Steel next year by 15% and 21%, respectively, to 3.4 trillion KRW and 834.9 billion KRW.

Researcher Baek Jae-seung of Samsung Securities said, "Steel companies in major regions such as the US, Europe, and China have already secured orders through the first quarter of next year, and iron ore prices are likely to adjust after concerns about Australian cyclones subside, so steel prices are expected to maintain a positive trend at least until the first quarter of next year."

This content was produced with the assistance of AI translation services.